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A big week for central banks

Weekly investor research

03 November 2014

This was a big week for central banks. Brazil surprised the markets by hiking rates 25bps despite serious economic weakness and Russia jacked up rates by 150bps in a bid to keep inflation under control amidst continuing RUB weakness as attention now shifts to currency intervention measures. Both Brazil and Russia are dealing with self-inflicted problems. The Fed ended QE, which means that the Fed is no longer pro-actively easing policy, though tightening is not on the cards anytime soon. But the biggest event of the week was Bank of Japan’s big QE bazooka, which fired in dramatic fashion in one of the most obvious manifestations to date that what developed market governments cannot fix by reform they aim to fix by devaluing their currencies and inflating away their debt. As for the rest of Emerging Markets (EM), they are largely passive observers of the printing frenzies orchestrated by the central banks in developed economies. The first order impact of easier monetary policies in Japan ought to be positive for asset prices, but markets are obsessed with zero-sum trades in the currency space. Thus expectations of ECB QE and Japan’s latest monetary splurge could well set in motion another temporary surge in the USD versus both EUR and JPY that ultimately could also leave EM FX in its wake. Less myopic investors should look to such a development with relish for the opportunity it provides to protect the purchasing power of capital at more attractive entry points by adding to positions in EM local markets.

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